Bond Prices Rise, But 10-Year Yield Still Near High From 2002

Reuters

Wednesday, 13 Jun 2007 | 4:21 PM ETReuters

SHARES

U.S. government bond prices recovered Wednesday after a week of heavy selling, reaching session highs as the Federal Reserve's Beige Book did little to upset the notion of a modestly expanding national economy.

A slight moderation in selling by mortgage players, partly blamed for the recent rout that pushed yields up 30 basis points in a week, helped the recovery in Treasuries, analysts said.

Treasuries held steady after the Federal Reserve's Beige Book, which reported that economic activity in the country expanded mid-April through May, with a number of areas reporting stronger growth.

"We are seeing a little bit of short-covering going on. The reaction is a bit more technical right now than it is fundamental. We had some trading desks that were short going into the Beige Book report expecting that the news was going to be a bit grimmer (for bonds)," said Georges Yared, chief investment strategist at Yared Investment Research in Minneapolis.

Benchmark 10-year Treasury notes were , versus 5.23% before the Fed report and 5.29% late on Tuesday. In earlier European trade, 10-year yields jumped to 5.33%, their highest in five years.

"The (Beige Book's) tame outlook on wages and prices was friendly and supports today's rebound in Treasuries, and it should be friendly for stocks as well," said Kim Rupert, head of global fixed income research at Action Economics in San Francisco.

Treasuries have been hammered by worries that strong global demand will force central banks to raise interest rates, as well as by selling from mortgage players in a move to shed their duration risk after yields jumped above 5%.

Official data earlier showed that U.S. retail sales in May grew at their strongest pace since early 2006, much faster than analysts had expected, while import prices climbed 0.9%last month, three times the consensus increase forecast by economists polled by Reuters.

Investors have surrendered hopes the Federal Reserve will cut interest rates this year and prospects of monetary policy tightening are increasing.